Legislature(2003 - 2004)

02/04/2004 01:34 PM CRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
    SENATE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE                                                                  
                        February 4, 2004                                                                                        
                           1:34 p.m.                                                                                            
                                                                                                                                
TAPE (S) 04-2 SIDE A                                                                                                          
                                                                                                                              
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Bert Stedman, Chair                                                                                                     
Senator Thomas Wagoner, Vice Chair                                                                                              
Senator Gary Stevens                                                                                                            
Senator Kim Elton                                                                                                               
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Georgianna Lincoln                                                                                                      
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 250                                                                                                             
"An  Act  establishing a  moratorium  on  the issuance  of  state                                                               
shallow natural gas  leases in the vicinity of  Kachemak Bay, and                                                               
directing  the commissioner  of  natural  resources to  reacquire                                                               
shallow  natural gas  leases on  the Kenai  Peninsula within  the                                                               
moratorium area; and providing for an effective date."                                                                          
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS ACTION                                                                                                               
                                                                                                                                
BILL: SB 250                                                                                                                  
SHORT TITLE: NATURAL GAS LEASES ON THE KENAI PENINSULA                                                                          
SENATOR(s): STEVENS G                                                                                                           
                                                                                                                                
01/12/04       (S)       PREFILE RELEASED 1/2/04                                                                                
01/12/04       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/12/04       (S)       CRA, RES, FIN                                                                                          
02/04/04       (S)       CRA AT 1:30 PM FAHRENKAMP 203                                                                          
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Mark Myers, Director                                                                                                            
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT:  Testified on SB 250                                                                                      
                                                                                                                                
Pirtle Bates                                                                                                                    
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT:  Testified on SB 250                                                                                      
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 04-2, SIDE A                                                                                                             
                                                                                                                                
CHAIR  BERT  STEDMAN called  the  Senate  Community and  Regional                                                             
Affairs Standing Committee meeting to  order at 1:34 p.m. Present                                                               
were Senators Elton, Gary Stevens, Wagoner and Chair Stedman.                                                                   
                                                                                                                                
        SB 250-NATURAL GAS LEASES ON THE KENAI PENINSULA                                                                    
                                                                                                                              
CHAIR BERT STEDMAN  announced SB 250 to be  up for consideration.                                                               
The bill establishes a moratorium  on shallow natural gas leasing                                                               
in the vicinity  of Kachemak Bay and asks the  state to reacquire                                                               
leases  within   the  moratorium  area.  The   bill  has  revenue                                                               
implications  and is  of  concern to  residents  in the  affected                                                               
communities.                                                                                                                    
                                                                                                                                
He  advised he  did not  intend to  move the  bill that  day. The                                                               
sponsor would  familiarize members  with the issues  and Director                                                               
Mark Myers would  speak to the fiscal impacts. He  would not take                                                               
public comment that  day, but comments submitted by  email or FAX                                                               
were  welcome  and  the  affected  communities  and  others  were                                                               
invited to listen via teleconference.                                                                                           
                                                                                                                                
SENATOR GARY  STEVENS, sponsor of  SB 250, thanked the  Chair and                                                               
said he  looks forward  to hearing  from the  public as  well. He                                                               
restated the purpose of the legislation and further explained:                                                                  
                                                                                                                                
     SB 250  reaffirms previous findings  of the  state that                                                                    
     Kachemak Bay and Homer area  are not really appropriate                                                                    
     areas  for  oil  development and  gas  development  and                                                                    
     there are  two instances I  present you. The  first, in                                                                    
     1976, the  state found it  in the best interest  of the                                                                    
     state to reacquire the oil  and gas leasehold interests                                                                    
     in Kachemak  Bay and the surrounding  upland areas. The                                                                    
     Legislature  approved  SB  720 that  year  for  several                                                                    
     reasons, but  mainly because it found  that the natural                                                                    
     environment and  intrinsic beauty of Kachemak  Bay area                                                                    
     supported  a  community  of economic  development  path                                                                    
     based on renewable resources  like tourism and fishing.                                                                    
     The  state reacquired  these leases  later  in 1976  so                                                                    
     that  the local  communities  would  not be  encumbered                                                                    
     with  the   conflict  associated   with  oil   and  gas                                                                    
     development in  this unique  environment. In  1999, the                                                                    
     state again found it in  the best interest of the state                                                                    
     to  exclude Homer  and [Kachemak  Bay] area  from area-                                                                    
     wide oil  and gas  lease programs. Today,  Homer enjoys                                                                    
     the benefits realized by  [excluding] Kachemak Bay, Fox                                                                    
     River  Flats critical  habitat area,  the Kachemak  Bay                                                                    
     State  Park, the  Alaska Maritime  Wildlife Refuge  and                                                                    
     our only  national estuarine  research reserve  and has                                                                    
     built a  thriving economy based on  tourism and fishing                                                                    
     and small business.                                                                                                        
                                                                                                                                
     One  of  the  unintended   consequences  of  this  1999                                                                    
     decision  was  to  make the  area  available  for  this                                                                    
     streamlined,   less  regulated   shallow  natural   gas                                                                    
     leasing program under  HB 394 that was  passed in 1996.                                                                    
     Following  the letter  of the  law  in HB  394 but  not                                                                    
     really the precedent  set in the past  three years, DNR                                                                    
     leased  the subsurface  rights of  22,000 acres  in the                                                                    
     Homer   area   last   June.   These   leases   included                                                                    
     predominantly    residential     areas,    schoolyards,                                                                    
     municipal  reservoir,  natural   environment  that  was                                                                    
     excluded from leases in the  past sales. This is a very                                                                    
     serious  concern.  The   benefits  of  exploiting  this                                                                    
     really  very small  gas  reserve -  22,000  acres to  a                                                                    
     depth of  3,000 feet -  would be much smaller  than the                                                                    
     economic and environmental cost  to the community would                                                                    
     be.                                                                                                                        
                                                                                                                                
     I've heard  from dozens, if not  hundreds, of residents                                                                    
     of the Kachemak  Bay area who are  very concerned about                                                                    
     this  and  are concerned  about  the  fairness of  this                                                                    
     streamlined  process that  led  to  these leases  being                                                                    
     let. Many of these citizens  feel they are being denied                                                                    
     an opportunity to  speak to the lease  sales because of                                                                    
     the fact  that no  notices or  limited notices,  and no                                                                    
     notices  in the  Homer  area newspapers,  which have  a                                                                    
     very wide  circulation and  should have  been included.                                                                    
     These  residents have  also  raised  concern about  the                                                                    
     unintended  statutory  preemption of  the  department's                                                                    
     ability to consider public  comments, the potential for                                                                    
     administrative  override of  local ordinances  and also                                                                    
     the lack  of clear environmental regulations.  A lot of                                                                    
     questions  remain about  whether  the  amount of  money                                                                    
     paid for these  leases might be less than  what it cost                                                                    
     the state to administer.                                                                                                   
                                                                                                                                
     There are also concerns  about the patchwork quality of                                                                    
     these  leases,  which  include  several  surface-rights                                                                    
     owners as well as areas  that are in residential areas,                                                                    
     schoolyards,  a   municipal  reservoir  and   then  the                                                                    
     natural  environment   that  was  excluded   from  past                                                                    
     leases.                                                                                                                    
                                                                                                                                
     In its resolution supporting this  buyback, the City of                                                                    
     Homer  is  concerned  about the  potential  affects  of                                                                    
     shallow gas  drilling on their water  supply. They have                                                                    
     a  water supply  that serves  450 homes  and businesses                                                                    
     inside   and  also   outside  the   city  as   well  as                                                                    
     groundwater  that  is  vitally  important  for  private                                                                    
     water wells. The  City of Homer is also  concerned - in                                                                    
     its resolution  - about the general  health and general                                                                    
     ecology of  the local  area economics.  [Residents] are                                                                    
     so dependent  on the  activities of  commercial fishing                                                                    
     as  well  as  sport   fishing,  charter  guided,  [and]                                                                    
     subsistence fishing.  The city is also  concerned about                                                                    
     tourism  and  land  values  and   roads.  The  City  of                                                                    
     Kachemak   and  also   the   Kenai  Peninsula   Borough                                                                    
     supported  buybacks through  resolutions and  this bill                                                                    
     is  supported overwhelmingly  by  a  majority of  Homer                                                                    
     residents.  I've had  a chance  to attend  a couple  of                                                                    
     public hearings in  Homer and 250 people or  so were at                                                                    
     those  hearings and  virtually to  a  person, they  are                                                                    
     overwhelmingly in support of this buyback.                                                                                 
                                                                                                                                
     You may  remember that Governor Murkowski  indicated at                                                                    
     one  time  that  he  would   at  least  consider  lease                                                                    
     buybacks  as an  alternative.  Mr. Chair,  I urge  your                                                                    
     support  for this  extremely  important legislation  to                                                                    
     the  people I  represent,  to continue  the state's  30                                                                    
     year  consensus of  supporting renewable  resources and                                                                    
     the  economic development  path on  the southern  Kenai                                                                    
     Peninsula and  hope the committee  will hold  a further                                                                    
     hearing on  this bill  to allow  for public  comment. I                                                                    
     will end by saying we have  not received a clear - well                                                                    
     actually the  fiscal note we received  is indeterminate                                                                    
     and I'm anxious to hear  of any further developments in                                                                    
     that area.                                                                                                                 
                                                                                                                                
CHAIR STEDMAN stated he would request additional information                                                                    
regarding the fiscal note. He then advised that when dealing                                                                    
with this type  of complex issue he would  appreciate having maps                                                               
provided to help relay information to the public.                                                                               
                                                                                                                                
SENATOR GARY STEVENS agreed to provide maps.                                                                                    
                                                                                                                                
CHAIR STEDMAN  asked Mr. Myers to  come forward and speak  to the                                                               
issue.                                                                                                                          
                                                                                                                                
MARK  MYERS,  Director of  the  Division  of  Oil and  Gas,  DNR,                                                               
reported  he  had  geology,  natural  resource  law  and  leasing                                                               
program experts available online to answer questions.                                                                           
                                                                                                                                
He assured  members that DNR  appreciates the  concerns expressed                                                               
regarding  the environment  and the  uniqueness of  Kachemak Bay.                                                               
That  being  said,  he  advised that  the  1979  moratorium  from                                                               
offshore  leasing   was  justified   under  AS   38.05.184  where                                                               
"Kachemak  Bay was  declared one  of the  state's most  important                                                               
commercial fisheries; and that even  minute quantities of oil may                                                               
be harmful  to larval  forms of crabs  and other  marine life..."                                                               
but there was no moratorium established for onshore leasing.                                                                    
                                                                                                                                
At  the  time that  DNR  switched  to  area-wide leasing  a  best                                                               
interest finding (BIF)  was called for and  the commissioner made                                                               
the decision  to draw the line  for the finding at  Anchor Point.                                                               
Because the  document did not speak  to the area to  the south of                                                               
the point,  no determination  was made  on the  value or  lack of                                                               
value of the  state's best interest for that  area. He emphasized                                                               
that  DNR  has  no  documentation  regarding  the  commissioner's                                                               
reason  for drawing  the  line at  Anchor Point;  it  was just  a                                                               
decision he made.                                                                                                               
                                                                                                                                
As a point of clarification  he explained that under conventional                                                               
oil and  gas leasing,  the state leases  all mineral  rights, not                                                               
just gas,  which is why  the Legislature was concerned  about oil                                                               
spills  into  the  marine  environment  and  why  they  made  the                                                               
determination that Kachemak Bay should be protected.                                                                            
                                                                                                                                
MR.  MYERS  acknowledged  the  leases   could  be  viewed  as  an                                                               
unintended  consequence of  the 1999  decision because  over-the-                                                               
counter,  shallow gas  lease sales  are  specifically allowed  in                                                               
areas excluded  from area-wide  leasing. Based  on the  nature of                                                               
the shallow  gas leasing  program law that  asks whether  the gas                                                               
would benefit the  residents of the local  area, the commissioner                                                               
made the appropriate decision.                                                                                                  
                                                                                                                                
With  regard  to adequate  noticing,  he  insisted the  sale  was                                                               
properly noticed  in the  newspaper. The fact  that it  wasn't in                                                               
the  Homer newspaper  was  an oversight  and  he apologized,  but                                                               
pointed out  that notice was  placed in the Peninsula  Clarion in                                                               
an effort to  reach the area involved. He noted  DNR was noticing                                                               
for leases in  the Mat-Su Valley at  the same time so  they did a                                                               
single   blanket   announcement   and   unintentionally   omitted                                                               
publication from  the Homer paper.  He explained the  shallow gas                                                               
program doesn't  allow a BIF  or the typical public  process that                                                               
people  are accustomed  to in  the area-wide  leasing program  or                                                               
exploration  licensing. DNR's  position is  that the  leases were                                                               
appropriately let,  but they realize  that there is  strong local                                                               
opposition to the shallow gas program.                                                                                          
                                                                                                                                
MR. MYERS  explained the procedure  for evaluating the  leases if                                                               
the state  were to conduct a  buy-back. First, the cost  value at                                                               
$500 per lease  multiplied by eight leases for a  total of $4,000                                                               
is established.  Next, DNR negotiates compensation  for work done                                                               
to  the point  of buy-back.  Finally, if  an agreement  cannot be                                                               
reached  with   the  lessee,  the   use  of  eminent   domain  is                                                               
authorized.  If that  mechanism is  used, the  state constitution                                                               
requires just  compensation to be  rendered, which  would include                                                               
the  cost of  the  lease, the  cost of  work  performed, and  the                                                               
potential value of the undiscovered resource.                                                                                   
                                                                                                                                
Valuing the undiscovered resource base  depends on the quality of                                                               
data  available and  the  interpretation of  that  data. In  this                                                               
case, DNR would look at analogs  onshore in Cook Inlet. The Homer                                                               
area is on structural trend  for conventional gas with some known                                                               
gas  fields and  reservoirs. Using  that model  and hypothesizing                                                               
that  one-fifth of  the state's  22,000 acres  is productive  and                                                               
there  is a  50 foot  pay  sand, DNR  estimates that  there is  a                                                               
conservative  20 bcf  of recoverable  gas and  an optimistic  100                                                               
bcf. Assuming a conservative $1  net per thousand cubic feet, the                                                               
ground value would amount to  roughly $20 million. The applicants                                                               
could claim significant resource value,  he said. It follows that                                                               
the fiscal  note is  indeterminate because  it is  dependent upon                                                               
what is negotiated.                                                                                                             
                                                                                                                                
MR. MYERS  speculated that many  of the leases won't  be explored                                                               
and will  probably be turned  back to  the state. They're  3 year                                                               
leases  and  about 2  years  are  remaining. When  reviewing  the                                                               
conventional 7 year leases, most  see no exploration activity for                                                               
one reason or  another and for 3 year leases  the process is even                                                               
more difficult.                                                                                                                 
                                                                                                                                
SENATOR KIM ELTON mused he was  puzzled as to why the leases were                                                               
let for  $500. The price  for the  lease isn't predicated  on the                                                               
value of the resource yet  the repurchase figure is predicated on                                                               
the  projected  value of  the  resource.  This, he  asserted,  is                                                               
particularly perplexing when the fiscal gap is considered.                                                                      
                                                                                                                                
MR. MYERS  acknowledged his  point was good  then noted  that the                                                               
intent of the non-competitive shallow  gas leasing program was to                                                               
provide rural energy  in remote areas. In  a competitive program,                                                               
multiple  companies  may bid  and  when  that occurs,  the  state                                                               
receives  the most  optimistic view  of the  value of  the lease,                                                               
which  is typically  better than  market value.  The shallow  gas                                                               
program is  different so the cost  of acquiring the lease  is not                                                               
in proportion to the value of the lease in a competitive market.                                                                
                                                                                                                                
Keep in  mind, he  said, the state  would also  receive royalties                                                               
and severance taxes  from the production. Using  the estimated $1                                                               
per 1000  cubic feet  net for  an optimistic  100 bcf  reserve, a                                                               
12.5 percent royalty  would result in receipts  of $12.5 million.                                                               
However,  if  the gas  was  used  for  local sources  and  wasn't                                                               
competing  against other  gas,  just half  that  amount could  be                                                               
expected.                                                                                                                       
                                                                                                                                
SENATOR ELTON  asked if there  had been  any effort to  work with                                                               
the  community  and buy  back  just  those  leases that  were  of                                                               
special concern.                                                                                                                
                                                                                                                                
MR.  MYERS  replied  the  points  were good  and  the  issue  and                                                               
concerns were  similar to  those expressed  in the  Mat-Su Valley                                                               
where drilling  activity has  begun. He  advised that  Pat Galvin                                                               
has been named  state coordinator for coal bed methane  and he is                                                               
leading  a   series  of  workshops   to  get  public   input  and                                                               
involvement  in  the process  of  looking  at the  public  notice                                                               
procedures as  well as the stipulations  and mitigation measures.                                                               
The   initial  stages   of  exploration   and  drilling   spurred                                                               
involvement in the  Mat-Su Valley and residents  weren't sure DNR                                                               
had covered the full spectrum  of regulatory issues with coal bed                                                               
methane.                                                                                                                        
                                                                                                                                
He informed the committee that  the commissioner of DNR scheduled                                                               
four major  workshops and several  additional public  meetings in                                                               
the  Homer area  to  go through  the process  to  assess how  the                                                               
stipulations and  mitigation measures  work. He warned  that it's                                                               
difficult to foresee what measures  might be required until there                                                               
is  a proposed  activity, but  the  details are  attached to  the                                                               
lease and give the state great power and latitude.                                                                              
                                                                                                                                
For  example,  if  coal  bed   methane  is  developed  and  water                                                               
produced, they  would expect  to be  required to  reinject water.                                                               
Surface entry might  be limited in certain areas as  well. In the                                                               
Homer  area,  where  conventional  gas  is  the  primary  target,                                                               
directional  drilling is  the appropriate  use of  technology. So                                                               
they're   able   to   offset   sensitive   habitats   and   drill                                                               
directionally  under  as  they  do further  north  on  the  Kenai                                                               
Peninsula.                                                                                                                      
                                                                                                                              
He repeated  that no one  has proposed a  well yet and  since the                                                               
leases are short  term it is likely that no  drilling will occur.                                                               
If  it  does,  there  will  be  full  community  involvement  and                                                               
stipulations and  mitigation measures will be  used. Finally, the                                                               
governor did  state that  he would  consider buy  back as  a last                                                               
resort if  it's shown that you  can't drill with minimal  risk to                                                               
the environment.                                                                                                                
                                                                                                                                
SENATOR GARY STEVENS  agreed with Senator Elton  that the process                                                               
for  buy  back doesn't  immediately  jump  to the  highest  value                                                               
because there is  room for negotiation between the  state and the                                                               
leaseholders along the way.                                                                                                     
                                                                                                                                
He  told Mr.  Myers  that  the community  was  advised that  this                                                               
development  would be  shallow gas  yet  the testimony  indicated                                                               
that the leaseholders were looking  at conventional gas. He asked                                                               
how a  shallow gas  permit that  is limited  to 3,000  feet could                                                               
become a much deeper, conventional gas development.                                                                             
                                                                                                                                
MR. MYERS  conceded there  is considerable  confusion due  to the                                                               
nomenclature  used   on  shallow   gas,  coal  bed   methane  and                                                               
conventional gas programs. He explained:                                                                                        
                                                                                                                                
     The shallow gas leases  contemplated all gas at shallow                                                                    
     depths so when  I use the term conventional  gas I mean                                                                    
     gas that's  present in a  reservoir that's  typically a                                                                    
     sandstone  at more  conventional play.  The gas  is not                                                                    
     found in  the coal  seam itself  as it  is in  coal bed                                                                    
     methane or in a fractured shale  as it is in some other                                                                    
     non-conventional  gas  sources.   So  conventional  gas                                                                    
     simply refers to the  more traditional reservoirs where                                                                    
     it's  more like  a tank.  You have  sand grains  and in                                                                    
     between those sand  grains are spaces and  there is gas                                                                    
     in  those  sand  grains.  The  gas  was  created  in  a                                                                    
     different  source and  it migrated  out of  that source                                                                    
     into a trapping mechanism of  some sort. Those type gas                                                                    
     fields  typically  recover  the gas  with  very  little                                                                    
     produced water and they are  generally produced at much                                                                    
     higher  production rates  than do  non-conventional gas                                                                    
     methods such as coal bed  methane. In coal bed methane,                                                                    
     the gas  is trapped in  the coal seam.  It's physically                                                                    
     within the coal and not  within the cracks in the coal.                                                                    
     When you  pull water out  of the cracks, it  lowers the                                                                    
     pressure in the coal and  gas actually comes out of the                                                                    
     matrix  of the  coal into  these cracks  and then  gets                                                                    
     produced along with the water.  So, it's sort of like a                                                                    
     bottle of  soda; with  an unlimited  supply of  CO  you                                                                    
                                                       2                                                                        
     shake it up  and produce the gas and out  comes the gas                                                                    
     with the water and you separate those two.                                                                                 
                                                                                                                                
     With conventional  gas, the gas is  typically by itself                                                                    
     in the reservoir, sometimes with  a little bit of water                                                                    
     underneath it,  but normally  just a  pocket of  gas in                                                                    
     the sand grain.  So you produce that,  you just produce                                                                    
     the  gas.  The advantage  of  conventional  gas is  the                                                                    
     rates are  much higher;  it takes  much fewer  wells to                                                                    
     drill  it  and generally  it's  more  economic if  it's                                                                    
     present.                                                                                                                   
                                                                                                                                
     The  conventional gas  in  this program  has  to be  at                                                                    
     shallow depths in  order to qualify - at  least part of                                                                    
     the  reservoir. One  of the  problems with  the shallow                                                                    
     gas program is it made sense  from a point of trying to                                                                    
     mitigate oil spill  risk by limiting depth  so you have                                                                    
     less chance  of encountering  oil, but it  doesn't make                                                                    
     any sense from a  production, conservation of resource,                                                                    
     maximization  of  producing  the gas  [standpoint].  It                                                                    
     also creates huge  quarrelative rights problems between                                                                    
     owners at  different depths. The difficulty  is it uses                                                                    
     3,000 feet  above the surface, true  vertical depth. If                                                                    
     your  surface is  like Homer  and you  have bluffs  and                                                                    
     sand, where  difference in  depth might  be 400  to 500                                                                    
     feet. [Indicated a  rolling wave variation] Underneath,                                                                    
     geologically you  could have a flat  line reservoir and                                                                    
     you could be  in and out of the coal  seam based on the                                                                    
     undulation of  the hills [with areas]  legal to produce                                                                    
     [and] not legal to produce.  The well doesn't care; you                                                                    
     don't  produce  just around  the  well  bore but  in  a                                                                    
     radius  of investigation  of significant  distance from                                                                    
     the well  bore. Coal  bed methane typically  [has] five                                                                    
     wells per square mile [and]  it would be less than that                                                                    
     for  conventional wells.  So you  have a  well that  is                                                                    
     draining an  area of say  one-quarter to  one-half mile                                                                    
     radius around  that area.  Some of  the gas  they would                                                                    
     legally  have  in a  3,000-foot  limit;  some of  which                                                                    
     would  be 100  percent  unleased state  gas rights.  On                                                                    
     some  of  that  gas  sale it's  12.5  percent  or  6.25                                                                    
     percent  and   some  yield   it's  100   percent.  Huge                                                                    
     quarrelative  rights huge  disincentive for  maximizing                                                                    
     production of the reservoir and  all these other issues                                                                    
     that we have  to deal with as an agency  to protect the                                                                    
     maximum recovery of resource  and maximum by the state.                                                                    
     It creates a huge problem.                                                                                                 
                                                                                                                                
     So, two years ago the  statutes was amended to say that                                                                    
     if part  of the field  was above 3,000 feet,  you could                                                                    
     produce  the  deeper gas  and  that  was aimed  from  a                                                                    
     practical  standpoint.  The  only logical  way  to  see                                                                    
     further development,  so when that was  passed, it does                                                                    
     allow -  if part of  that field  is above 3,000  feet -                                                                    
     for  you  to follow  that  same  field down  to  deeper                                                                    
     depths. I  would advocate that is  the only responsible                                                                    
     way  to develop  the  gas  resources; otherwise  you're                                                                    
     going to leave a lot of  value in the ground. You won't                                                                    
     maximize  recovery.   I  think  that  is   one  of  the                                                                    
     unintended  consequences  of  the shallow  gas  leasing                                                                    
     program. It really didn't  contemplate beyond leasing -                                                                    
     to  the next  stage  of what  do you  do.  In coal  bed                                                                    
     methane, when  you get below  about 4000 to  6000 feet,                                                                    
     the  pressures  of  the  earth   on  top  collapse  the                                                                    
     fractures in  the coal  that are  necessary to  get the                                                                    
     gas out of the coal.  Realistically there is a limit of                                                                    
     depth between  4000 and 6000 feet  depending on geology                                                                    
     in  which coal  bed  methane simply  will  not work  no                                                                    
     matter what  you do. Conventional  gas, that can  go as                                                                    
     deep as  20,000 feet - so  a big difference in  how you                                                                    
     would produce  it - but  still all that gas  above 3000                                                                    
     or 4000 feet  depending on definitions of  what part of                                                                    
     the  field   is  still   definitely  shallow   gas  and                                                                    
     allowable to be produced from the lease.                                                                                   
                                                                                                                                
SENATOR  GARY STEVENS  remarked that  the understanding  that the                                                               
leases  are  shallow  gas  and   are  limited  to  3000  feet  is                                                               
incorrect. In  fact the depths  could be considerably  deeper and                                                               
there could be conventional gas development.                                                                                    
                                                                                                                                
MR MYERS  replied there  is no more  environmental impact  from a                                                               
deeper  well  and  a  lot of  advantages  because  production  is                                                               
maximized  with   fewer  well   bores.  "From  a   technical  and                                                               
environmental  standpoint, I  think  the 3000  foot depth  didn't                                                               
make a whole lot of sense and I  think that is why it was amended                                                               
two years age."                                                                                                                 
                                                                                                                                
SENATOR   GARY   STEVENS   noted   that  the   Homer   area   was                                                               
unintentionally excluded  from the public notice  process for the                                                               
lease  sales  while  Talkeetna was  properly  noticed.  Talkeetna                                                               
expressed concern and  they were removed from the  lease sale and                                                               
he questioned whether  that might have happened in  Homer as well                                                               
had they responded similarly.                                                                                                   
                                                                                                                                
MR. MYERS pointed  out there is little geologic  potential in the                                                               
Talkeetna  area  and  DNR  made  the  determination  that  leases                                                               
wouldn't  benefit the  area residents.  In contrast,  there is  a                                                               
geologic trend  in the Homer area  and the area has  a population                                                               
of 15,000 and no source  of natural gas. Although community input                                                               
is taken into  consideration, the standard isn't  a best interest                                                               
finding standard. It  is a standard that is much  more focused to                                                               
the  benefit of  gas  and, he  maintained,  the commissioner  had                                                               
little discretion but to grant those leases.                                                                                    
                                                                                                                                
PIRTLE  BATES,   leasing  program  expert,  DNR,   testified  via                                                               
teleconference and  explained the notices for  Talkeetna, Mat-Su,                                                               
and Homer  were identical. "For  the Talkeetna area, it  was done                                                               
in the statewide  paper, which was the Daily News  as well as the                                                               
Frontiersman  for  the  Mat-Su Talkeetna  area.  Whereas  on  the                                                               
peninsula we did  notice in the Peninsula  Clarion." In addition,                                                               
local community councils, municipalities,  local boroughs as well                                                               
as  regional and  village Native  corporations were  notified. He                                                               
reported they received  no response from the core  Mat-Su area or                                                               
the  Kenai Peninsula  other  than from  the  borough and  several                                                               
state   agencies  whereas   Talkeetna   residents  registered   a                                                               
significant number of comments after  the original public notice.                                                               
As a result of the  concerns expressed, DNR attended local public                                                               
meetings and responded to a number of comments from Talkeetna.                                                                  
                                                                                                                                
It  is  a   misconception  that  the  bill   prohibits  DNR  from                                                               
considering  public comment,  but  the  legislation creating  the                                                               
program does  require the use  of decision criteria  that weights                                                               
geologic  evaluations.  As a  result  of  the  work done  by  DNR                                                               
resource evaluators, the director decided  not to issue leases in                                                               
the immediate Talkeetna area.                                                                                                   
                                                                                                                                
SENATOR WAGONER asked  for a specific list  of which publications                                                               
were notified of the proposed lease sales.                                                                                      
                                                                                                                                
MR. BATES agreed to provide a complete list to the committee.                                                                   
                                                                                                                                
CHAIR STEDMAN asked Mr. Myers if he had additional comments.                                                                    
                                                                                                                                
MR.  MEYER  stated DNR  is  sensitive  to  the need  for  balance                                                               
between  the  environmental  and  resource needs,  but  they  are                                                               
concerned about  the gas reserve base  in Cook Inlet and  they do                                                               
see geologic  potential in the  Kachemak Bay area.  He concluded,                                                               
"As we're learning in the Mat  Valley, the public process is very                                                               
important and  we don't intend  to short  it to the  extent we're                                                               
allowed under the law."                                                                                                         
                                                                                                                                
CHAIR  STEDMAN  noted supporting  resolutions  from  the City  of                                                               
Homer, Kenai and Kachemak were in member's packets.                                                                             
                                                                                                                                
SENATOR GARY STEVENS asked whether  there were other leases south                                                               
of Anchor Point and outside the scope of SB 250.                                                                                
                                                                                                                                
MR. MYERS  replied DNR isn't  aware of any other  applications in                                                               
the   Homer  area.   Since  it's   an  over-the-counter   program                                                               
applicants are free  to apply any time, but there  is currently a                                                               
moratorium on  leases until the  coal bed methane process  in the                                                               
Mat-Su Valley  is complete. He  continued to report  there aren't                                                               
any  conventional leases  offshore, but  there is  a federal  OCS                                                               
[outer continental shelf]  sale scheduled in lower  Cook Inlet in                                                               
May 2004.                                                                                                                       
                                                                                                                                
CHAIR STEDMAN recapped several points:                                                                                          
                                                                                                                                
  · There is considerable public concern regarding this issue                                                                   
   · DNR is looking for ways to mitigate potential impacts                                                                      
   · The leases have approximately two years left                                                                               
   · Drilling has not begun                                                                                                     
                                                                                                                                
He held SB 250 in committee.                                                                                                    
                                                                                                                                
CHAIR  STEDMAN  announced  the  next meeting  would  be  held  on                                                               
February 9,  2004 at which  time the  committee would take  up SB                                                               
260.  With  nothing further  to  come  before the  committee,  he                                                               
adjourned the meeting at 2:21 pm.                                                                                               
                                                                                                                                

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